John Jostins who is a professor of sustainable transport design at Birmingham University drives the hydrogen powered Microcab used by Royal Mail on the Birmingham campus. Photograph: Fabio De Paola for the Guardian

The term "hydrogen economy" refers to the vision of using hydrogen as a low-carbon energy source – replacing, for example, gasoline as a transport fuel or natural gas as a heating fuel. Hydrogen is attractive because whether it is burned to produce heat or reacted with air in a fuel cell to produce electricity, the only byproduct is water.

Hydrogen is not found in pure form on Earth, however, so it must be produced from other compounds such as natural gas, biomass, alcohols or water. In all cases it takes energy to convert these into pure hydrogen. For that reason, hydrogen is really an energy carrier or storage medium rather than an energy source in itself – and the climate change impact of using it depends on the carbon footprint of the energy used to produce it.

One of the most potentially useful ways to use hydrogen is in electric cars or buses in conjunction with a fuel cell which converts the hydrogen into electricity. Fuel cells are attractive because they're far more efficient than the internal combustion engines they can replace – though the latter can still be used with hydrogen fuels if desired.

At the moment, hydrogen is most commonly produced from natural gas. In this situation, a typical fuel cell car generates 70–80g CO2 for each kilometre driven – similar to a modern gasoline hybrid or to a battery electric vehicle charged with today's UK grid electricity. These emissions can be reduced towards zero if the hydrogen is produced using low-carbon electricity sources such as renewables, nuclear or CCS to electrolyse water. The downside is that in this situation only around half as much electricity comes out of the fuel cell as was put in to produce the hydrogen in the first place. The rest is lost as heat.

Partly for this reason, and partly due to concerns over the commercial readiness of hydrogen fuel cell cars, battery-based electric cars have received more attention in recent years than hydrogen cars. However, hydrogen vehicles retain a number of important advantages: they can be rapidly refuelled in just a couple of minutes and have a range of many hundreds of kilometres. So the best technology depends on the final cost, carbon mitigation potential, and consumer needs in each case.

In addition to transport, hydrogen may also be useful as a way to store renewable energy from intermittent sources – for example, when the wind is blowing but there is not high demand for electricity. In this context, it's an alternative to large-scale batteries or other storage systems. Another possibility is to use hydrogen as a heating fuel in our homes and buildings, either blended with natural gas or neat.

It is the flexibility that hydrogen offers that makes it so potentially useful within future low-carbon energy systems. It can be produced from a wide variety of resources and can be used in a wide range of applications, such as power generation, as a transport fuel for low carbon vehicles, for the chemical industry, and for low carbon heating. Moreover, hydrogen is already used extensively in the chemical industry so industry is familiar with its production, handling and distribution on a large scale. For all these reasons, many experts see hydrogen as a key enabler of the lowest-cost low-carbon energy system.

While hydrogen can help to decarbonise our energy system, however, it is important to be specific about where and when hydrogen can help. In that sense, it might be better to think about 'hydrogen in the economy' rather than 'a hydrogen economy' as such.